U.S. Economic News:

The number of Americans filing for initial unemployment benefits slowed last week after hitting an eight-month high, according to the Labor Department.  Initial claims fell by 5,000 to 256,000, missing expectations of a fall to 249,000.  The four-week average of claims, smoothed to iron out the weekly volatility, rose by 6,250 to 249,250.  Jobless claims have been ticking higher since hitting a low of 166,000 in March.  Still, readings under 300,000 are still considered a robust labor market.  Meanwhile, the number of people already collecting benefits fell by 25,000 to 1.36 million. 

Home prices pulled back in May from their record high set in April, according to the latest report from S&P Case-Shiller.  The Case-Shiller 20-city home price index retreated to a 20.5% annual gain in May, down from 21.2% the previous month.  S&P said that the year-over-year growth in May was the second highest for the 20-city index.  April’s gain was the peak.  Tampa, Miami, and Dallas led the cities with the highest annual gains.  Minneapolis, Chicago, and Washington D.C. were the lowest.  Regionally, the South and Southeast experienced the strongest price growth at 30.7%.  Lou Crandall, chief economist at Wrightson ICAP, claimed that the decline in housing affordability to its lowest level in 15 years, would start to “restrain house price acceleration”.  The cost of borrowing has increased dramatically since last year, with the average on the 30-year fixed-rate at 5.54%, according to Freddie Mac. Last year around the same time, that rate was at 2.78%.

Pending home sales, transactions in which a deal has been signed but not yet closed, fell by -8.6% in June, according to the National Association of Realtors (NAR).  The result was a significant miss.  Analysts had forecast pending home sales to drop by just 1%.  The drop in pending home sales is the biggest since the depths of the pandemic in April and March 2020.  Compared with a year earlier, transactions were down 20%.  Furthermore, new home sales, builder confidence, and declining mortgage application volume, are waning simultaneously.  Lawrence Yun, NAR Chief Economist, stated “Home sales will be down by 13% in 2022, according to our latest projection.”  He added that buying a home in June of 2022 was 80% more expensive than in 2019.

The Federal Reserve hiked interest rates again this week as it strives to reign in rampant inflation.  The Fed lifted its key rate by 0.75 percentage point to 2.5%, a move that was widely expected.  The increase was its fourth this year in its aggressive bid to cool the hottest inflation in four decades.  Furthermore, the Fed signaled more rate hikes are coming even as the economy shows clear signs of slowing.  “Ongoing increases” in interest rates “will be appropriate,” the Fed said.  Chief economist Avery Shenfeld of CIBC World Markets stated, “While there are looming concerns over growth, the Fed has decided that in the battle against inflation, it will shoot first and ask questions later.”  The level of rates right now matches what the Fed considers neutral–neither boosting nor slowing the economy.  Powell was noncommittal about future rate increases.  Rates would go higher, he said, but the Fed would make that decision based on the incoming economic data.

The U.S. economy shrank at an annual 0.9% pace in the second quarter, marking its second quarterly decline in a row.  The reading was a wide miss from consensus forecasts.  Economists had expected a 0.3% increase.  The back-to-back declines in GDP were the first since the 2007-2009 Great Recession.  A drop in business investment and smaller increase in inventories largely accounted for the negative GDP print in the second quarter.  However, consumer spending – the main engine of the U.S. economy – rose at a 1% annual rate.  While two consecutive quarters of declining GDP has been commonly viewed as the official definition of a recession, a group of prominent economists responsible for declaring official recessions announced that the old rule of thumb does not always apply.  Regardless, as chief economist Richard Moody at Regions Financial states, “The economy has clearly slowed.”

Inflation surged again last month, remaining at a 40-year high, a key price gauge showed.  The Personal Consumption Expenditures (PCE) Index, rumored to be the Fed’s preferred measure of inflation, rose a sharp 1% in June, led by higher fuel prices.  The increase exceeded forecasts of a 0.9% advance.  A narrower measure of inflation that omits food and energy costs, “core PCE”, rose by 0.6%.  That was also above estimates.  The rate of inflation of the PCE over the past year climbed to 6.8% from 6.3% in the prior month–the highest rate since January 1982.  Unlike the more publicized Consumer Price Index, the PCE gauge takes into account how consumers change their behavior in response to higher prices.  They might substitute cheaper goods such as ground beef for more expensive ones like ribeye to keep their costs down, for example.

Consumer spending, which makes up around 70% of the U.S. economy, jumped 1% in June, but the big increase was largely due to higher prices rather than true growth.  After adjusting for inflation, spending rose by just 0.1%.  In essence, consumers paid higher prices instead of buying more goods and services.  Incomes also rose 0.6% in the month however, not enough to keep up with inflation.  Households are continuing to fall behind financially.  The savings rate fell to a 13-year low of 5.1% in June from 5.5%.

Confidence among the nation’s consumers declined for a third consecutive month in July, the Conference Board reported.  The board’s Consumer Confidence Index fell 2.7 points to 95.7 in July—worse than expected.  Economists had expected a declined to just 97.  The sub-index that tracks how consumers feel about current economic conditions fell to 141.3 this month, down from 147.2 in June.  And the gauge that assesses what Americans expect over the next six months ticked down to 65.3 from 65.8.  Rising inflation and forecasts of an imminent recession have weighed on consumers.  Lynn Franco, the senior director of economic indicators at the Conference Board, stated “Looking ahead, inflation and additional rate hikes are likely to continue posing strong headwinds for consumer spending and economic growth over the next six months.”

Orders for goods expected to last at least three years, so-called ‘durable goods’, increased 1.9% last month, but beneath the headline number the report wasn’t as optimistic.  Orders for new cars and trucks rose 1.5% in June, while orders for fighter jets and military planes jumped 81%, lifting the overall number.  New orders outside the transportation segment rose a smaller 0.3%.  The increase in so-called core orders, a measure of business investment, was 0.5% for the second month in a row.  Business investment has climbed 8.4% over the past year; however the rate of growth has slowed steadily since hitting a pandemic high of 22% in April 2021.  Senior U.S. economist Andrew Hunter wrote in a note to clients that the details of the report are “consistent with a sharp slowdown in private equipment investment growth in the second quarter.” [1]

The Week Ahead

The FOMC removed forward guidance from last week’s statement, saying that its
next steps will depend on data released between now and the next meeting in midSeptember. Inflation numbers will remain top of mind, but with two consecutive
quarters of contracting economic growth, the U.S. labor market will be closely
scrutinized for confirmation of recessionary conditions. Jobless claims have been
on the rise and high-profile companies are freezing hiring, so this week’s employment
data is timely. The JOLTS job openings report drops Tuesday, followed by
unemployment claims Thursday and the monthly non-farm payrolls on Friday. This
week also features ISM PMIs, which are expected to decline but remain in expansion
territory. Factory orders, trade balance figures, and consumer credit round out the
domestic calendar. Internationally, central banks are in focus, with the Bank of
England potentially poised for the first 50bps rate hike in its 25 years of
independence. The RBA is expected to implement its third straight half-point
increase as inflation becomes more entrenched in the Australian economy. Lastly,
China releases PMIs as embattled property developer Evergrande faces a debt-restructuring deadline. [2]

Chart of the Week: 10Yr Yields Look to Have Formed a Head & Shoulders

What happens to Treasury yields in an inflationary environment when GDP
contracts and the Fed tightens? According to the 10-Year Treasury Yield Index
(TNX), a bearish head and shoulders top pattern has formed. The pattern
develops when the peaks in price reverse from going higher to lower, while the
troughs remain relatively flat. It confirms when price breaks below the neckline support, which happened last week. Patterns like this may end in failure, but for now the technicals suggest lower yields may be coming.

Click on the Chart to Enlarge. [3]

Sources: [1] Asset Guidance Group analysis, www.stockcharts.com; All index- and returns-data from Yahoo Finance; news from Reuters, Barron’s, Wall St. Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat,0020Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet [2] tdainstitutional.com; [3] stockcharts.com. 

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